A debt consolidation loan is the process to which a consumer takes out a loan to consolidate debt. The consumer obtains this type of loan, usually has more than one creditor and they often want to consolidate all these bills into one loan. Doing a debt consolidation loan will often has its advantages and disadvantages. Through this tutorial, we hope to help consumers learn about the advantages and disadvantages to a credit card consolidation loan.
First, a debt consolidation loan is often done in order to secure a lower interest rate. Many consumers who try and obtain these types of debt loans, often try and request a lower minimum payment as well. By doing this the consumer will zero out the balances on the credit cards they owe and have one monthly obligation to the lender who issued the consolidation loan. Sometimes, companies may offer incentives like no closing costs or other benefits to try and obtain the consumer as a client. When considering these types of loans, it's important to make sure that the interest rate is fixed and does not increase months or even years down the road.
The credit card loans almost always require some sort of collateral. It’s important to understand, that no bank would want to give a loan to a consumer who already proved themselves not responsible with the first set of credit cards that were originally issued. They say an estimated 95% of consumers come close to the credit limit in the first 30 days of card activation. The lenders whom issue these types of loans, know these facts and will often see this when they pull a credit report prior to the loan being issued. Since creditors are not foolish to give a loan to someone who is already knee deep in debt, the banks will require collateral in the form of physical property. This property is almost always a mortgage and the home must have positive equity otherwise the loan will be denied. Given the home does not have positive equity, the chances of that consumer getting the debt consolidation loan, will be virtually impossible.
The advantages to a credit card loan
The credit card consolidation loan are usually recommended when consumers have extremely high interest rates. This would be one of the key advantages to the loans, is that the interest rates would be reduced. By getting a loan, consumers can get out of credit card debt in a fraction of the time by having a reduced rate. The credit card companies are often unwilling to work with the consumers directly and when using these types of lenders in order to get the credit card companies paid off, consumers may be able to get on new terms which in turn will help them repay the debt sooner, than if they were to do it themselves. In addition to this, another advantage to the consolidation loan would be the reduction of minimum payments. Since the consumer is obtaining a loan and probably doing so with several years attached, the minimum payment will be reduced.
The disadvantages to a credit card consolidation loan
The consolidation loans have disadvantages as well. When obtaining a credit card debt consolidation loan, consumers will often turn everyday unsecured debt, into secured debt. This would mean that given the consumer didn't maintain the minimum payments, the creditors would try and taken the consumers home in order to collect on the loan that was issued. Another disadvantage to the consolidation loan, is that consumers will have a zero balance on the credit cards paid off. Although that may sound like an advantage, it actually hurts the consumer because it provides an added temptation on reusing the credit cards. Since most consumers come close to the credit limit in the first thirty days of activating the cards, consumers are likely to run up these cards all over again but would now have a consolidation loan to worry about.
When you should consider a credit card consolidation loan
If you’re like most consumers and feel as if your interest rates are to high, your minimum payments cannot be met or that your balances are not going down – it may be a good time to consider a credit card consolidation loan. Many consumers, who consider these types of loans, feel as if the balances they owe on are just not moving. These balances can often range from a series of reasons on why they don’t move. Most of the time, consumers often find that the balances don’t go down due to high interest rates. When a consumer makes minimum payments on high interest rates, the possibility of the balances going down are usually minimal to none. By getting a credit consolidation loan, the consumer will be able to apply more towards the actual balances when they secure a lower interest rate through the actual loan.
The second most popular reason on why consumers seek out this loan, is for the reduction of minimum payments. Many consumers are finding it very hard to maintain the minimum payments each month. This may be due to the downward spiral of the economy or unemployment skyrocketing to nearly 14% in 2011. Regardless of what the situation may be, most consumers are finding it hard to make the minimum payments. Now before we discuss this further, it’s important to understand that credit cards and loans are designed to be paid off in full each month. When this can’t be done, it’s absolutely imperative for consumers to double up on the minimum payments. By doing this, consumers will be able to have control of their debt and not be enslaved to it. Given a consumer obtains a credit card consolidation loan, it’s important to make sure that once the credit cards are paid off that they close the accounts to prevent future use or temptations. Credit card debt gives consumers the illusion of having money that simply does not exist. By shredding the credit cards or removing them entirely, consumers will not need to worry about running up those cards once again.
Top 5 credit card consolidation loan tips
Below, we will explain the top 5 credit card consolidation loan tips, and how they actually benefit consumers.
By using these consolidation loans, consumers will be able to consolidate all monthly obligations into one lump sum. Consumers will no longer need to worry about having several monthly payments, as the consolidation loan its self will work to give that consumer one monthly obligation. For consumers who have several credit cards, this reason is extremely beneficial to the consumer. But when the consumer has just a few cards, consolidating may not necessarily be the primary reason for obtaining the loan.
Reduce minimum payments
By applying for a credit card consolidation loan, consumers will be able to reduce minimum payments. The average minimum payment with credit cards is 3% of the total balance each month, by getting a debt consolidation loan consumers will be able to get this number down to 2% in most cases. Since unemployment is soaring in the United States, this is one of the most popular reasons for considering the consolidation loans as a means to repay credit card debt.
Reduce interest rates
Most consumers feel as if the minimum payments they do make are not necessarily being applied towards the actual balances. Since most consumers feel this way, reducing the interest rates and finance charges is an absolute must. Many consumers will get a lower interest rate when they seek out a consolidation loan. These interest rates will often be under 10% in most cases. To get a better idea of how beneficial this will be, the average consumer tends to have interest rates in the high 20s. Since the consolidation loan works to reduce interest, this is the second most popular reason for considering these loans.
Reduce payback length
This reason somewhat coincides with option 3 above. By getting on new terms with the creditors, consumers will find that a huge part of the minimum payments they do make will go towards the actual balances and not towards finance charges. Since so much is being applied towards the principal, consumers will find that the payback length will be reduced dramatically.
Stress is a common occurrence in our daily lives. By getting a credit consolidation loan, consumers will be able to reduce their stress levels and they’ll no longer need to worry about all the creditors and several minimum payments that are due. It’s important to close the credit cards once paid, to avoid the temptation of them being ran up again to avoid that stress.
Additional disadvantages to a credit card consolidation loan
In almost all cases, credit cards are often labeled as a type of debt often referred to as unsecured debt. This means that given the consumer stopped making the minimum payments, that the creditors could not come and take physical property from you. However, when consumers obtain the consolidation loan, the banks will often want some sort of physical property in order to secure the loan. With this being said, if a consumer applies and does not have collateral, the chances of them securing the loan will be impossible. However, when situations like these arise programs like the credit card debt consolidation program do exist.
In addition to these types of loans, consumers cannot include federal student loan debt. These loans and programs are often made for credit card debt and collection accounts only. Accounts such as Federal tax or child support also cannot be included in these types of loans. The credit card consolidation loan will help consumers consolidate all debt into one single payment. For consumers wanting to reduce their stress levels and have one monthly obligation, these types of solutions may be able to help consumers get back on track financially and avoid future debt problems.
Additional reading information:
Often times, consumers jump to debt consolidation loans not knowing when to properly do it. It's the mission of our company to try and explain to consumers the key advantages and disadvantages to a consolidation loan. We've included additional articles which may help when trying to make this decision.